Tips and Tricks on Cash Flow Forecasting

Tips and Tricks on Cash Flow Forecasting

Many entrepreneurs start a business to do what they love – and that would probably be marketing and selling a product or service. Most likely, accounting and other financial activities are carried out for the sole purpose of accomplishing requirements. However, if there’s one thing that startup founders or business owners must be keen on, it’s tracking and forecasting cash flow. 

(Read our article on Tips on Improving Cash Flow here.) 


Whether a business is just starting, operating, or is in the stage of scaling, staying on top of cash flow is essential.

A 2021 analysis from tech market intelligence platform CB Insights revealed that the top reason why startups fail is that they ran out of cash or they were unable to raise new capital.

If you want to avoid the same fate, you require a reliable cash flow forecast so you can avoid potential problems such as cash shortfalls. 


What is a cash flow forecast, and why does it matter?

A cash flow forecast is more like a budget. However, instead of getting estimates of the company’s revenue and expenses, it reveals the business’s cash inflow and outflows and when they will occur. Typically, a forecast will cover a 12 to 24-week period. You can prepare these forecasts on a weekly, fortnightly or monthly basis depending on the business.

Forecasting helps ensure that the business has enough cash to continue its normal operations and enough money to pay suppliers and employees even during quieter periods. Another benefit of cash flow forecasting is that it gives business owners an idea of their cash commitments and how much cash the business requires to meet these commitments.  


How do you prepare a cash flow forecast?

Follow these five steps to prepare a cash flow forecast:

Step 1:  Look at the sales performance from the previous periods and analyse what your cash inflow will be over that period.

Step 2: Review where those sales were generated from and identify the timeframe for receiving the payments. Remember to account for cash sales. 

Step 3: Take a look at bank statements and examine your cash flow over the previous periods.

Step 4: Add all fixed & variable costs in the forecast. (e.g. rent, salaries, loan repayments, cost of sales)

Step 5: Include all tax-related and payroll compliance amounts, like BAS, PAYG, payroll tax and superannuation.


Infographic of steps to complete a cash flow forecast

Having all the information you need will give you a clear picture of how your business must perform over the forecast period to ensure that you have enough funds available.

Be as accurate as you can. It will help if you are precise when estimating various types of cash inflow and outflow. Take the conservative approach when preparing your forecast. 

How can you accurately project cash flow?

Here are our tips to achieve an accurate cash flow forecast:

Tip #1: Be realistic – If you want to get an accurate cash flow forecast, you need to ensure that your estimates and projections are honest and that every item is included.

Tip #2: Use previous sales history Your past sales records are a good starting point to estimate future performance in the next planning period. 

Tip #3: Factor in both fixed and variable expenses – Fixed costs such as wages, rent, loan repayments are easier to forecast as they often remain constant. The challenge is predicting variable costs (advertising costs, commissions, professional fees) as these change. It is helpful to review past periods to get a more realistic estimate of your variable expenses. A tip is to include a buffer.

Tip #4: Prepare for the quieter months – If your business is affected by seasonality, make sure to set aside a budget for your fixed costs during the lean months.  

Tip #5: Set aside time to review and update forecast – Many business owners prepare a yearly cash flow forecast, set it aside and then only check it after a year. If you’re looking for more effective results, you need to periodically revisit and update your cash flow forecast. 

Tips to accurately prepare a cash flow forecast.

Get help from a professional 

If you’re unsure where to start or want to get a realistic cash flow projection, you can consider working with a professional, such as a Virtual CFO or an accountant. A VCFO will prepare your forecast and provide you with expert advice on the best way to proceed. 

At Cloud CFO, we provide cash flow forecasting and other customised accounting services ideal for small to medium businesses and startups. If you want to know how we can assist you with your finances and manage and grow your business, please contact us.  

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